A simple guide to budgeting
Estimated read time: 3 Minutes
Have you heard about the 70-20-10 Rule? It’s a simple practice, that could help to kick-start your savings. The rule helps break your monthly income into manageable amounts.
Here's how the 70-20-10 rule works
By breaking your monthly income into three different segments – Must Haves, Wants and Savings – you may start to think more about prioritising your outgoings and could start to see your savings grow.
70% - Must Haves
Typically, ‘must haves’ are your unavoidable outgoings. These could include your mortgage, rent, credit cards, power bills, school fees, groceries, or insurance.
Online subscriptions don’t count. Sorry. If something can be delayed for a while, then it’s probably not a ‘must have’. By deciding what is necessary and what’s not, could help to give you the power to make smart financial choices and prioritise your ‘wants’.
20% - Wants
Even when you are being responsible with your money, you may need to plan for some extra expenses each month. Clothes are not a must-have every month, but you will likely need to purchase some over the course of a year.
Takeaways, new clothes, a personal phone plan, the aforementioned online subscription – these things are ‘wants’ and can play an important part in your life. Keeping these expenses to just 20% of your outgoings could help to keep you on top of your finances. A good attitude to have is that ‘once you’ve spent it, it’s gone’ – so you’ll have to wait until your next pay check before spending on your ‘wants’ again.
10% - Savings and Debt
10% might not seem like a high proportion of your income, but over time your savings could really start to add up. The most important aspect of saving – like getting exercise – is building it into your life so it becomes a permanent habit. If you don’t have any debt, then great - the whole 10% could go straight into your savings. Whereas, if you’ve got debt and you’re finding it hard to pay it off, you can focus on repayments.
Everyone’s financial situation is different, but no matter the size of your pay check, if you can start saving on a regular basis then you could take the first steps towards achieving your financial goals.
Not sure if this is the right approach for you?
With the cost of living on the rise, the 70-20-10 rule has become popular. But if you can't afford to save 10% on a regular basis, then aim for 5% or whatever you can afford. Budgeting should be flexible to suit your real life situation. The key is to do the math and understand what you can afford to save and make that an aim on a monthly basis. So why not give it a try? It could put you on the right track towards saving for a home loan deposit, a holiday, a new car, or just for a rainy day.
How to work out what you're spending?
One way to work out where you’re spending your money is to keep a record of where it’s going. Collect all your receipts for at least a week and keep track of them using an app like the MoneySmart TrackMySPEND. You’ll be more conscious of what you're buying and you'll see exactly where your money goes.
Once you have a record of everything you buy, put the different types of purchases into categories so you can see where you spend the most. For example, household expenses like electricity and gas will go in one column, while groceries will be in another. MoneySmart’s budget planner calculator is a great tool to help you categorise your expenses and help you see how to budget and save.
Under the pump financially?
Debt consolidation could be an option.
If you have too many ‘must haves’ eating into your monthly income consolidating your debts could be an option. Debt consolidation is a type of loan refinancing that draws in multiple debts, like credit cards, phone bills, personal loans and car loans into just one loan account. This takes you from multiple payments to one monthly amount.
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Contributor | Therese McGrath, Chief Financial Officer
Therese brings over 25 years of international experience in finance, strategy, and operations. She joined Pepper Money in January 2018 as Chief Financial Officer. In this role, she provides the leadership and financial and operational management necessary to ensure Pepper Money achieves its strategic goals and objectives. Read more.
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